— Dual Functions as a Funding Currency and Safe-Haven Asset —
1. Overview
As of 2025, the Japanese yen (JPY) plays a dual role in the international financial system:
- A major global funding currency that fuels carry trades and international investments.
- A safe-haven currency that attracts capital during periods of market turbulence.
This duality is underpinned by Japan’s ultra-low interest rate policy, its structural current account surplus, and the depth and liquidity of its domestic capital markets.
2. Why the Yen Serves as a Funding Currency
(1) Ultra-Low Interest Rate Policy
- The Bank of Japan (BoJ) maintains one of the lowest policy rates among advanced economies.
- A historically wide interest rate differential with the U.S. and Europe has sustained the profitability of yen carry trades.
- Low borrowing costs make the yen attractive as a funding source for leveraged global investments.
(2) Ample Liquidity and Creditworthiness
- Japan’s government bond market is the largest in the world, with over ¥1,100 trillion outstanding, providing unmatched liquidity.
- High sovereign credit ratings make yen-denominated assets desirable as collateral.
(3) Typical Risk-On Capital Flow
- Borrow yen at ultra-low interest rates from Japanese institutions.
- Convert into higher-yielding currencies (USD, AUD, MXN, etc.).
- Invest in government bonds, equities, or commodities in those markets.
- Reconvert profits into yen for repayment, provided the yen does not appreciate sharply.
3. The Yen as a Safe-Haven Asset
(1) Yen Appreciation in Risk-Off Phases
- During global financial stress, unwinding of yen carry trades leads to rapid yen appreciation.
- Structural demand for yen is reinforced by Japan’s persistent current account surplus.
(2) Historical Examples
- 2008 Global Financial Crisis: USD/JPY dropped nearly 20 yen within a month.
- 2011 European Debt Crisis: Surge in yen buying as investors sought safety.
- 2020 COVID-19 Shock: After an initial dollar liquidity scramble, the yen regained safe-haven demand.
4. Four Key Roles of the Yen in Global Markets
- Low-Cost Funding Source – Powers global leveraged investment strategies.
- Volatility Amplifier – Sudden carry trade unwinds can cause sharp moves in FX and equities.
- Safe-Haven Asset – Backed by political stability and a current account surplus.
- Regional Reference Currency – Used in parts of Asia-Pacific trade and as a reserve asset.
5. Current Challenges and Outlook
(1) Challenges
- Prolonged ultra-low rates create persistent depreciation pressure on the yen.
- Heightened FX volatility impacts import costs and corporate earnings.
- Heavy reliance on global capital flows could entrench external vulnerabilities.
(2) Outlook
- As long as U.S. and European rates remain elevated, yen carry trades will continue, keeping the yen under pressure.
- If domestic wages and inflation stabilize, the BoJ may have more scope for gradual rate hikes.
- In the near term, the yen’s safe-haven status is unlikely to change, but over the long term, shifts in Japan’s current account and fiscal position could alter its role.
6. Conclusion
The Japanese yen is simultaneously a global liquidity provider in risk-on phases and a safe refuge in risk-off environments.
While this dual role supports global market stability, it also makes the yen a channel for rapid capital flow reversals.
Japan’s monetary policy must therefore balance domestic macroeconomic needs with the international consequences of altering the yen’s global role.
